Australian FTA TV Industry
Long-term Dynamics are Structurally Sound
Broadcasting & Radio
Colin MorawskiAC
(61-2) 9220-3051
colin.v.morawski@jpmorgan.com
Laurent Horrut
(61-2) 9220-1593
laurent.j.horrut@jpmorgan.com
J.P. Morgan Securities Australia Limited
See page 40 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
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investment decision.
Figure 1: Relative Performance
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Mar-09 Apr-09 May -09 Jun-09
ASX 200 Industrials
TEN
SEV
Source: Bloomberg
• Beyond Leverage Industry is Structurally Sound. Currently leverage
plagues the FTA broadcasters, however it is our opinion that the
fundamentals of the industry are sound and regulatory environment supports
this. Regulation such as anti-siphoning will continue to ensure that viewer
share at FTA broadcasters remains relatively high.
• Looking Through the Threats We Believe FTA TV Survives. In this
report we highlight a number of threats facing the FTA business, including;
falling advertising market, ratings war, financial leverage, Pay TV, and the
internet. We believe that these threats are manageable and highlight
international examples and local market structures to support our views.
• Three Year FTA Advertising Recovery Expected. We expect FTA ad
revenues to recover to pre-crisis levels in 2011, three years after the
beginning of the crisis. Analyzing examples within Australia and around the
world, we have come to the conclusion that three years is the likely time
frame in which FTA advertising dollars return to pre-crisis levels.
• FTA Broadcasters Need to Fight Fragmentation. Fragmentation of
viewing audiences by increasing the number of channels (multi-channeling)
decreases the effectiveness of the mass market audience strategy that most
advertisers require, forcing FTA broadcasters to lose some of their mass
market appeal. However, mass market audience owners get a premium
because they are the only channel through which an advertiser can gain
access to the mass market.
• TEN: Leverage Still the Issue. As argued in this report, we believe in the
long-term viability of the FTA business model. As such we are positive on
the long-term prospects for TEN. However, near term financial risk related
to debt covenants gives us concern and keeps us Underweight.
• SEV: Although shares of SEV are trading below cash backing, we maintain
our Neutral rating due to the uncertainty around redeployment of cash.
More clarity around the CMJ stake and other possible asset purchases or
uses of cash would prompt us to revisit our current view on the stock. Due
to the highly-levered SMG assets, the majority of the value in SEV shares
comes from listed investments and cash. As such shares should be viewed
as a portfolio play on Kerry Stokes and the media industry.
• Transfer of Coverage. With this report Colin V. Morawski assumes
coverage of Ten Networks.

Table of Contents
Executive Summary .................................................................3
Australian Industry Structure & Regulatory Landscape ..............................................3
Overleveraged Capital Structures ................................................................................3
FTA Advertising Cycle: 3 Year Recovery...................................................................3
FTA Broadcasters - Threats and Risk Mitigation...................4
Threat #1- A Deep Advertising Cycle......................................4
TV Ad Revenue: Severe Contraction...........................................................................4
Risk Mitigation - The Limit of Revenue Diversification.............................................6
Threat #2- Ratings War and Content Costs............................8
How Has Ratings Effected Ad revenue? Int’l Examples ............................................8
Australian TV Ratings: Where to From Here? ............................................................9
The Cost of Ratings ...................................................................................................12
Threat #3- Financial leverage ................................................14
Overleveraged Capital Structures ..............................................................................14
Risk mitigation- Equity raisings and refinancing.......................................................14
Threat #4- The rise of Pay-TV ................................................16
Audience Fragmentation and Ad Spend Erosion .......................................................16
Risk Mitigation #1- Protective Anti-Siphoning Regime Unlikely to be Loosened....17
Risk mitigation #2 - Multi-Channeling......................................................................19
Digital Switchover .....................................................................................................19
Multi-channeling........................................................................................................20
The Impact of Freeview.............................................................................................22
Offshore Precedents of DTT Platforms - The UK Case Study ..................................23
Threat #5 - The Internet..........................................................26
Structural Shift to Online ...........................................................................................26
IPTV Threats..............................................................................................................27
US IPTV (Telco TV) .................................................................................................27
Ten Networks..........................................................................29
Investment view.........................................................................................................29
Key Earnings Drivers.................................................................................................29
Content & Key Contracts...........................................................................................32
Capex .........................................................................................................................33
Valuation....................................................................................................................34
Capital Structure ........................................................................................................34
Seven Networks......................................................................37
Investment View ........................................................................................................37
Key Earnings Drivers.................................................................................................37
Valuation....................................................................................................................39